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CHAPTER 14

you participate. Most thrift and savings plans require the employer to make contributions on behalf of the employees, and the account will accumulate much faster since you won’t be the only one contributing.

SALARY REDUCTION PLANS. The most common form of employer- sponsored retirement account is the salary reduction plan, or the 401(k). The term 401(k) refers to the IRS code that establishes these accounts. 401(k) plans are available to those employees in for-profit, private business. There are similar plans for people who work for pub- lic schools, universities, colleges, and nonprofit hospitals; these are known as 403(b) plans. Employees of state and local governments, as well as some tax-exempt organizations, will participate in 457 plans.

401(k) plans are a type of defined contribution plan, and as such, many employers will contribute to their employees’ 401(k) accounts. Sometimes an employer will match 50¢ for every dollar contributed by the employee up to a certain percentage of salary, but sometimes an employer will match dollar for dollar up to a percentage of salary. Employer contributions are not counted as part of the employee’s gross income, and so the employees aren’t taxed on that until they begin to take distributions from their plans. Plus, any contribution made by an employee is taken out of the employee’s gross income and sheltered until distributions begin. All earnings grow tax-deferred. Most employers offer a wide range of different types of investments that the employees may invest their 401(k) money in. The advantages to the 401(k) plans are quite beneficial to the employee. While the tax treatment for 403(b) and 457 participants is the same as for the 401(k), many employers do not match for 403(b) plans, and matching for 457 plan participants is almost nonexistent. (See Table 14.2)

Table 14.2 Contribution Limits for Salary Reduction Plans

Year

401(k)/403(b)/457 plans

2002

$11,000

2003

$12,000

2004

$13,000

2005

$14,000

2006

$15,000

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